Finance Committee on March 12th, 2020

[The Chair, Liberal, Wayne Easter]

I call the meeting to order. Pursuant to Standing Order 108(2), the finance committee is doing a study on corporate subsidies.

I want to welcome all the witnesses here.

We have you on video, Mr. Oldham, from London. We can see you. We hope you can see us as well. We'll get to you as the third witness.

We will start with, as an individual, Dr. Jack Mintz, president's fellow with the School of Public Policy at the University of Calgary.

Mr. Mintz, welcome. The floor is yours.

[Dr. Jack Mintz, President's Fellow, School of Public Policy, University of Calgary, As an Individual]

Thank you very much, Mr. Chair. It's a pleasure to be before the finance committee. Over the years, I have done this a number of times, so it's always nice to see you again.

“Corporate welfare” is a loaded term that most economists would simply define as business subsidies or grants. Tax incentives can also be included, since they are simply an alternative method of providing grant support, although with different implications.

Why do governments provide targeted business subsidies? Three arguments can be made.

First, businesses tend to underinvest in innovation if they cannot capture all the returns from their activities, even though they bear the full cost. While patents protect a significant amount of the return since other businesses must license the knowledge, some innovation is simply widespread and can be used by others without paying for the cost. To encourage an optimal amount of innovation, tax credits or grants are justified. The question is how much innovation support should be provided. Obviously, if patents are available, less support is needed.

Second, an argument has been made to subsidize infant industries where learning-by-doing, scale and risk may deter investment activity. It is not clear why the market cannot support an infant industry; large companies can easily invest capital in new projects and bear the risk themselves, and venture capital investors may support many small firms as well.

Third, support may be provided if smaller companies have difficulty raising risk capital. This argument relies on information asymmetries that occur when outside investors cannot easily distinguish between good- and poor-quality firms. It results in good firms underinvesting in capital, since the cost of capital is too high. While good firms may convey that they have certain strengths, such as a low leverage ratio, to separate themselves from bad firms, it still will not eliminate the problem of high financing costs due to informational asymmetry. The economic answer is to provide investment grants or tax credits that benefit stronger firms more, and not subsidize equity, since the latter encourages too many poor-quality firms to enter the industry.

Politically, governments often provide business subsidies simply to favour activities deemed to be important. Instead, these subsidies create three economic costs.

The first is a misallocation of resources, as capital is subsidized to support low-productivity enterprises that should naturally decline, rather than those with strong opportunities. Too many poor economic projects become supported, leading to a decline in economic growth. Although economic impact analysis is often conducted to support some subsidy programs by measuring direct and indirect job gains, these studies are based on poor economic assumptions, since they typically assume that indirect jobs come from unemployed resources—in other words, people who are just sitting on park benches—when in fact they are drawn from other productive parts of the economy.

The second is that business subsidies might increase the demand for inputs and hence cause rising input prices. The impact of tax credits for investments in fishing, for example, can be offset by higher boat prices. Little or no activity might be generated, as owners of land, capital or labour might capture the value of the subsidy through higher rents, profits and wages.

The third is that business subsidies are a cost to government budgets. A government may have to raise taxes. That has a cost of its own—corporate and land transfer taxes having the highest economic burden, followed by personal income taxes and then sales and property taxes—or the subsidy is paid by cutting back other expenditures, such as education and training, which might have bigger returns to society.

In a recent publication, Elizabeth Pringle of EY Canada provides a review of government incentives for targeted businesses, taken from an international database, wavteq. This does not include broad subsidies, such as research and development tax credits, but it tracks various announcements by governments to support specific firms. Subsidies include loan guarantees, grants, tax concessions, training grants, etc.

I'm going to use U.S. dollars for all this, because that's what the publication used. Besides, the exchange rate moves them up and down anyway.

From 2014 to 2018, Canadian federal and provincial governments provided $5.2 billion U.S.—or right now, roughly $7 billion Canadian—in incentives to support $31.6 billion U.S. in capital expenditure. This is a subsidy rate of 14.9% of capital expenditures for those firms that benefit from these subsidies.

The largest subsidies accrued to the automotive sector—that's $834 million—which is almost one-fifth, followed by consumer goods, $465 million; and non-renewable energy at $391 million. The highest subsidy rates as a percentage of capital expenditure were in consumer goods, 30%; electronics, 25%; services, 21%; and industrial goods, 19%.

The largest subsidies are paid to companies in Ontario and Quebec, with $2.5 billion in Ontario and $1.8 billion in Quebec, making up 82% of all subsidies provided in Canada. However, the biggest subsidy rates are in Newfoundland and Labrador, at 57%, and Saskatchewan, at 50%; while Alberta and Manitoba have the least, at 5%, as percentages of their capital expenditures, or CapEx.

In comparison to other countries, Canada has a lower subsidy rate for specific companies than Brazil or the Czech Republic, but we have a higher subsidy rate, which is more than the U.S. rate of 10% or Australia at 10% or the U.K. at 4%. We're at 15%, as I mentioned earlier.

I think we should be asking ourselves whether our business support programs make sense. Are they helping to grow the economy, or are they reducing productivity? Many subsidies are directed to companies that could be failing or have low economic returns. If that is the case, it would be better to reduce expenditure and direct funds to broad tax relief or program spending, which matters most to productivity.

Let me just add a few things.

Recently I wrote a piece on equity-based tax incentives. These include things like labour-sponsored venture capital credit, Quebec stock savings plans, the B.C. investor tax credit, the Alberta investor tax credit and a lot of these things.

Theory would predict that you'd end up getting too many bad projects entering the industry: Investors don't really pay as much attention to the economic returns because they're just looking at the tax benefits they get from that. Also, they can get very significant tax benefits, not only from the individual credits but also by using RRSP deductions, flow-through shares, donation credits, and things like that, which play a role.

What every study has shown is that the economic returns—this is when you take away the tax benefits—are close to zero. That's why I've been very much against many of these equity-based incentives. In fact, I would argue more strongly for investment-based incentives such as grants and investment tax credits and the R and D tax credit, which I think can have positive impacts.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Jack.

Turning to Canada's Digital Technology Supercluster, we have Ms. Paish, CEO; and Ms. Gill, vice-president, government relations.

The floor is yours, Ms. Paish. Welcome.

[Sue Paish, Chief Executive Officer, Canada's Digital Technology Supercluster]

Thank you, and thank you for inviting me to speak here today. My name is Sue Paish. I am the CEO of Canada's Digital Technology Supercluster.

Like many Canadians, you may be asking, “Who are you? What do you do? How do you do it, and why should we care?”

I'm going to answer those questions in a moment, but first I want to start to talk to you about why I'm part of this organization.

I am the proud mother of three amazing young women. For the past 35-plus years that I've been in the business community, everything I have done is to build a better Canada for my children and all of their friends, which in today's connected world includes hopefully your children as well.

As chair of the Greater Vancouver Board of Trade in 2010, and for the past two years as the chair of the Business Council of British Columbia, I have seen data on Canada's declining competitiveness. I wondered whether we were doing enough to address our society's most pressing issues, issues such as climate change, sustainable health care, the competitiveness of our economy and being able to scale companies emerging from our vibrant technology and other sectors. To me, it did not seem that we were getting Canada ready for an increasingly complex and competitive world.

The notion of an entirely new approach to innovation caught my attention. The more I looked into it, the more I concluded that this is gutsy stuff. I decided I was going to see what I could do to test this program and its potential, so here I am, 22 months in the role, and I can tell you that I see the potential of the program.

For example, Protein Industries group, out of the prairies, uses technology to make Canada a leading source for plant protein. The Next Generation Manufacturing group in Ontario will build manufacturing capabilities using technology such as advanced robotics and 3D printing. The scale ai company will bring retail, transportation and other sectors together to build intelligent supply chains through AI and robotics. The Ocean Supercluster is focused on capturing the big opportunities from our oceans.

But returning back to the digital supercluster, who are we? We are a member-based not-for-profit organization composed of over 450 organizations representing some of Canada's brightest minds and names in health, communications, technology development, natural resources, research and industrial manufacturing. We are solving some of industry's and society's biggest problems through a collaborative innovation model the likes of which this country has not seen before.

Here are a few examples.

What if we could use data to speed up the time it takes to identify and locate major weather events such as forest fires, and reduce their impact? Perhaps we could even get to the point where we can forecast where and when these events might happen through data collected by Canadian-built earth observation satellites.

What if we could build an integrated data platform to collect, secure and leverage data on the health of our freshwater resources and use this data to better protect the health of our lakes, rivers and streams? This is something that we do not do now in a country with tens of thousands of these water bodies.

What if we could reduce the diagnosis time for malignant melanoma from six months to a matter of days? One in six Canadians will get this disease in their lifetime right now. Your survival rate over the period of six months goes from 85% to 15%, but It takes you six months to get an appointment to see a dermatologist for diagnosis.

These are just three of the 21 examples of the problems we are solving through the projects we have selected to date so far.

How do we do this? This is where it gets interesting.

We start with identifying the big problems, the problems that need solving to build a better Canada and to improve the strength and resilience of our economy. Next we bring disparate organizations together to discuss potential solutions. This is not generally how Canadian industry solves problems. Generally if there's a problem, a single organization or two get together and try to solve the problem. If they don't have the talent or the tools they need, they go and buy it. That's not what we do.

We bring together small entrepreneurial companies, researchers, large enterprises and medium-sized organizations and invite them to explore potential solutions to these problems. As they do this, we have seen that solutions emerge that are different from and better than any single organization could do on its own. This is collaborative innovation.

It's exciting to see this level of activity and the results that we're delivering in less than two years. We've received over 100 expressions of interest and we've invited 36 teams to submit formal proposals over three competitive project calls that we have launched since summer 2018. We have many more in development.

What's equally exciting is what we did not expect, and that is the benefits that flow from ideas that we did not advance and the benefits from interactions that come from the work that this organization does by bringing different organizations together.

Consider Finger Food Advanced Technology Group in Port Coquitlam, B.C. If Mr. Julian were here, I would point to him. It's just down the street from his riding.

Finger Food was part of a team that submitted a proposal in 2018. We did not select that proposal; however, as a result of the relationship built during the development of the proposal, there was a ripple effect, including a new partnership with Enbridge, as well as other companies. This prompted the opening of an office in Calgary for Finger Food where they now project hiring an additional 200 people by 2023. It's exciting to see that what we do is becoming a material, fundamental element in creating a new culture of innovation that is spawning new ways for organizations, small and medium, to grow and succeed.

There's DNAstack from Toronto. Since joining the supercluster, this company's Toronto office has doubled in size, growing from eight to 16 employees and with a 50% jump in revenue forecast for this year.

Vancouver-based MetaOptima, which raised $8.6 million in series A funding in 2018, has now grown to more than 70 employees since joining the supercluster.

We're launching competitive calls for projects approximately every six months. Our fourth call for projects is slated for this summer, so the next time I am here, I look forward to sharing the success stories with you.

Projects selected to date have budgets totalling $65 million, 60% of which is from industry and partners. Half of this investment is from small and medium-sized enterprises. SMEs make up 52% of our project participants, and we're just getting started.

Our real-world successes and failures have calmed my personal apprehension about this program and this policy. I can see the stunning potential of the entire innovation supercluster initiative, and in particular what we are doing in our innovation supercluster organization in British Columbia.

I started telling you that everything I do in my life I do to build a better country for my kids and all of their friends as well as my granddaughter. I am both proud and determined to tell you that this initiative is part of filling my obligation to my children and yours.

Thank you. I'd be happy to take your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Sue.

Turning all the way over across the water there, to London in the United Kingdom, we have Mr. Oldham, who is with Carbon Engineering Ltd.

Welcome, Steve. The floor is yours.

[Steve Oldham, Chief Executive Officer, Carbon Engineering Ltd.]

Thank you.

Good morning, good evening, good afternoon, whatever it may be.

Let me start by apologizing for the fact that I'm not physically present with you today, but I think I have a very good reason.

Yesterday I met with His Royal Highness Prince Charles. We were asked to come over and brief him on the technology that we've developed.

That was one of several meetings. I've also been in 10 Downing Street, talking to the Prime Minister's personal advisers. I've seen every major British government department in the last three days.

This comes on the back of work in 2019, when we did the same thing in the United States, seeing several of the candidates for the U.S. presidency through the Senate and through Congress, and seeing multiple senators and departments dealing with addressing climate change.

Here in Canada, we're doing the same thing. Why is that? How can a small Canadian company with less than 50 people at the time possibly get in at that level to see those types of people? The answer is that Canada has developed a technology through what we do at Carbon Engineering that can make a material and significant impact on the fight against climate change.

We are one of only three companies in the world that has developed a technology to pull CO2 directly out of the atmosphere.

You hear so much about emissions control. How do you stop CO2 from going up? It's very hard. It gets a lot easier if you can pull CO2 molecules down at the same time. The technology that we've developed here in Canada allows you to uniquely do that on a large scale.

When you can eliminate any CO2 emission from any point on earth, of any type and at any moment in time, you now have a way to address climate change, and you have a way to get to net zero without causing massive disruption by banning flying and all the other various measures that will have a material impact on our way of life.

Again, how can a small Canadian company get to the point where it can develop that type of technology? It's thanks to the support of a lot of Canadian government institutions, and thanks to some pretty detailed review of our technology, our business plan and our value proposition.

Capturing CO2 from the atmosphere is very hard. It's 400 parts per million. It's like pulling a single drop of ink out a swimming pool. It's the same technological challenge. It's taken us 10 years to get there. We started that technology before anybody talked about the need for negative emissions, before the IPCC wrote their reports saying that unless we start pulling CO2 out of the atmosphere, we're going to have a huge climate change problem.

Who do you go to when you're developing that type of technology, when you are ahead of the trend and you are pre-revenue?

We went to various government departments, and over the last 10 years, we've received $14 million in funding from Canadian government departments. Now we've more than matched that. We've raised over a $113 million in private funding, the vast majority coming from outside the country and now being spent in Squamish, in Vancouver, in our other sites, and at our research partners across the country.

This was not a trivial exercise. We lost many grants too. We competed for work with SDTC, with NSERC, with IRAP, with NRCan, and we lost plenty of times too.

Crucially, we won a few. Those pieces of work that we won in those early days, backed by the other funding that we got, allowed us as a company to develop the technology that today, in my meeting with Prince Charles, he identified as potentially a world-saving technology. I don't see this as a subsidy. I see this as strategic support for early-stage companies that have great ideas.

When getting external money is the hardest thing to do, government support is critical. We've benefited from that every step along the way; we're grateful for that, and we think the Canadian taxpayers will benefit from that, way beyond any investment that the Canadian government has made.

We think one of the critical elements of any government is to support the development of critical ideas and to assist companies in their early days, but only when there's evidence that those ideas make sense, when they're in the public good, and when other people are willing to put their money in as well to back them.

In summary, I think the structure of R and D support in Canada is strong. If it wasn't for that, we would not be here as a company with a world-leading technology with a potentially massive impact on the number one issue facing the planet today.

I would urge the committee to think long and hard about the success stories that have occurred in Canadian technology development, and in other fields as well, thanks to the support of Canadian government departments.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Steve.

Turning to Connexion Matawinie, we have Ms. Cormier, director general.

Welcome. The floor is yours.

[Caroline Cormier, Director General, Connexion Matawinie]

Mr. Chair and honourable members of the committee, thank you for your invitation to appear today.

My name is Caroline Cormier. I am the director general of Connexion Matawinie, a non-profit organization mandated by the Matawinie regional county municipality, located in the Lanaudière region of Quebec. Our mandate is to build a fibre optic network for the entire territory of Matawinie RCM to ensure that all residents, businesses and industries have access to broadband telecommunications services—in other words, high-speed Internet.

The completion of this project will require the installation of 2,700 kilometres of fibre optics in 15 municipalities. 42,500 residences and businesses will be served throughout the Matawinie RCM municipal area, which is as large as Belgium. That will give them an opportunity to have an Internet connection with a speed of up to 100 megabits per second. To my knowledge, our project is the largest one undertaken by an RCM in Quebec so far.

The cost of our project to build a fibre optic network is estimated at $60 million. Despite a number of studies and the inability of major telecommunications service providers to provide the required broadband Internet access throughout our territory, our project was rejected, as it was too big. Therefore, the council of mayors of the Matawinie RCM decided, in 2016, to carry out a feasibility study.

Now, the Quebec department of municipal affairs and housing has provided a $60-million loan. That loan must be reimbursed over 25 years, which will be done in part using royalties from telecommunications service providers and municipal taxes paid by local citizens.

It is inconceivable that, in 2020, a number of regions like mine have no access to a reliable Internet service. The Matawinie RCM is among the poorest in Quebec and its economic vitality is fairly weak. More than 6% of its population was living below the poverty line in 2015.

Every week, business owners and citizens from the region share problems that their Internet access causes them. Here are a few examples. A graphic designer must drive for 45 minutes to Joliette, the closest urban centre, to send files to a client. A business owner specializing in digital marketing has been unable to work since she decided to live in the country. A manufacturing company cannot compete for international jobs simply because it cannot automate its factory. Some tourist companies cannot accept online payments, and that is reducing tourist access to our region, which is quite pretty, by the way.

In addition, the region's changing demographics and the exodus of young people are seen as inevitable. After high school, those young people leave the region to continue their studies, and only 5% of them return to live in Matawinie. We cannot attract newcomers because we don't have Internet access, which complicates workforce retention. We are also unable to attract vacationers, even though our region has a lot of cottages and offers many tourist activities. Those people could not live in Matawinie full time even if they wanted to because Internet access is lacking.

Nowadays, there is a lot of talk about COVID-19. Many businesses in Canada will have to ask their employees to work from home. Unfortunately, telework is practically impossible in Matawinie, as very few people have that option in the RCM.

The region's economic future is dependent on broadband Internet access, as that would mean increased productivity for the region, not only for businesses, but also for citizens. Better Internet access will help revitalize our region's economy and will enable our young people to receive a distance education and our citizens to become better educated.

Despite a number of technical obstacles we are experiencing with the major telecommunications service providers, we need financial support to carry out this project. So far, the funding is coming through the Quebec program Régions branchées and the broadband fund. We are competing directly with major telecommunications companies, but they do not provide that service to our region's entire population.

Additional funding will help us lighten our citizens' financial burden and enhance our region's vitality. We must not forget that the average age of our citizens is currently 48 years and that more than 6% of the population is living below the poverty line.

Our objective is to enable the Matawinie citizens to have the world at their fingertips. As a non-profit organization, however, we are competing with major telecommunications service providers, which have priority in terms of funding.

In closing, thank you for your invitation. I would be happy to answer your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Caroline.

We'll turn to Philip Cross with the Macdonald-Laurier Institute.

Welcome, Philip.

[Philip Cross, Senior Fellow, Macdonald-Laurier Institute]

Thank you for having me back.

The federal government currently spends at least $18 billion on corporate subsidies, although the government does not publish easily accessible estimates of how much it allocates. This is equivalent to one-third of all corporate income tax revenues of $52 billion. The largest programs were administered by Natural Resources Canada, ESDC, Industry Canada, regional development agencies and Canadian Heritage.

Subsidies can be of short-term benefit to individual companies and specific regions; however, they also distort Canada’s overall economy, encouraging investment in areas that are less productive. Spending on subsidies ultimately is supported by higher taxes that penalize the competitiveness of businesses positioned for growth in the marketplace.

Reducing even a small number of subsidies and using the savings to lower the corporate income tax would restore Canada’s tax advantage over the United States, encouraging more investment in Canada.

More broadly, focusing government policies on creating a favourable business climate for growth and innovation through less government regulation and lower taxes would encourage all businesses to pursue growth strategies using Canada’s skills and knowledge honed over decades of experience.

Canada’s economic development has been guided by entrepreneurs who understood the opportunities and skills shaped by our history and geography, not subsidies provided by government. Canada created global brands in oil and gas, banking, railways, hydro power, pipelines, communications and mining by building on our natural advantages.

The list of subsidies to unsuccessful businesses is a long one: cucumber farms and an oil refinery in Newfoundland, a heavy water plant in Cape Breton, steel mills and auto plants in Quebec, the New Flyer bus plant in Manitoba and the Arrow plane manufacturer. The graveyard for high-tech companies that received subsidies is particularly crowded, including companies such as Consolidated Computers, Telidon and Dynalogic Hyperion.

Billions of dollars are given to companies to encourage research and development and innovation, with little evidence that these activities have materially improved as a result. Billions more are spent on regional diversification. What started as a program to help poorer regions, such as the Atlantic provinces and northern Ontario, has now been extended across the country, which is both costly and self-defeating for regional development.

Instead, these programs operate more as slush funds for politicians to reward favoured industries and supporters, with little evidence that they reduce entrenched patterns of regional inequality or boost overall economic growth. Quebec’s recent economic resurgence, as government spending and taxes are curtailed, shows that good governance, not corporate subsidies, best reduces regional inequality.

There is a place for temporary direct government support of particular firms and sectors with a proven record of success. During the 1986 oil price crash, federal government intervention kept the Hibernia project afloat, an investment that paid off handsomely for workers, governments and other members of the consortium. When the 2009 great financial crisis threatened the survival of auto manufacturers and parts suppliers, government support helped this industry survive and restructure.

However, interventions such as Hibernia and the auto sector should be the exception during times of crisis and not a model for routine and recurring government subsidies of business. Too close a relationship between government and a company creates conditions for corrupt practices. The renowned economist Dani Rodrik said, "State-business collaboration is just another name for corruption.”

Subsidies have an insidious effect on corporate priorities and strategies. Instead of focusing on innovation and efficiency, firms focus on lobbying government for handouts. In 1972 the National Association of Manufacturers moved its headquarters from New York to Washington, stating that “We have been in New York since before the turn of the century because we regarded this city as the center of business and industry. But the thing that affects business most today is government.”

It is a sad comment that a major business organization believes success for its members depends more on its relationship with government than with suppliers or customers. Until recently, a notable exception has been America’s hugely successful big tech companies, almost all of which are on the west coast, where their focus is on customers and growing their business, not on lobbying Washington.

If anything, the nexus between government and business is worse in Canada. Its origins go back at least to the British government granting a monopoly to the Hudson’s Bay Company. It grew with the development of railroads in the 19th century and tariff protection for manufacturers under the National Policy. Industry minister C.D. Howe extended government’s reach during the war by entrenching monopolies in the private sector or by creating Crown corporations.

Robin Broadway of Queen’s University recently wrote that Canada is developing a “rent-rich economy”. Rents are captured when government confers a benefit on one party and not others, usually by insulating it from competition. If StatsCan had an industry classification for rent-seeking, it would probably be Canada's largest industry. Too much effort is devoted to the granting of favours and subsidies from governments in Canada, and not enough to creating innovative and efficient companies that can compete on the world stage.

The federal government mandates an exhaustive inventory of contacts between lobbyists and government officials, yet the end goal of much of this communication—either direct subsidies to firms or an exemption from competition—remains opaque. Creating an inventory of such outcomes would help document for the public not only the frequency but the substance of the extensive communication between business, lobbyists and government.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Philip. We've kind of touched all the bases, I'd say, going across the line.

We'll be able to go to full rounds for this panel. That is six minutes for the first round.

You're up, Mr. Poilievre.

[Pierre Poilievre, Conservative, Carleton, ON]

One of the problems with this debate is that while the beneficiaries of government handouts are highly visible, the payers of those costs are dispersed and therefore invisible. We have the visible benefit and invisible cost.

It reminds me of about four years ago when the Ontario government showed up to a manufacturer and gave a big fat grant. The company took the money and said afterward that the existence of the grant will create no additional jobs. They said that they would do the project in which they were investing with or without the grant, but given the opportunity for free money, they'd take it. There's a saying in economics that if somebody's throwing money out a window, stand next to the window. You can't really blame the business for doing the rational thing, although it's irrational for taxpayers to be paying the cost. That cost is real, and the only benefit was to the shareholders of that company and to the politicians in the provincial government who got to show up, present a cheque and pretend that they were responsible for a bunch of jobs that would have happened with or without them.

My question is for Mr. Cross. These economic development agencies and governmental bureaucracies will regularly generate one-sided reports to claim benefits from their subsidies. They will say that this subsidy created 10 new jobs. They won't prove that those 10 jobs would not have existed without the grant; in many cases, they would have. They will say, for example, that the subsidy has leveraged $5 of investment for every $1 in taxpayer contribution, but offer no proof that the $5 would not have otherwise been invested somewhere else, acting on the assumption that the investors would have taken their $5 and just put it under a mattress had there not been a subsidy in place.

They don't perform any calculation for the costs to a competitor. For example, in my riding, a guy developed a smart phone app, only to discover that a competitor who invented the same app a year and a half later got a subsidy to do it. Now his competitor has taken all of the business because he has an extra pile of free cash to pay for his marketing. They don't measure the cost to the original inventor of a subsidy being given to his competitor.

There are all these invisible costs, such as opportunity cost, the cost to taxpayers and the cost to competitors. All of these costs are real, but they're not calculated anywhere.

Dr. Cross, you are the former chief economic analyst of Statistics Canada, so you would know more than almost anyone about how to measure and calculate things. How could we create a model to properly calculate the cost of corporate welfare, so that we no longer have these one-sided analyses from government departments, lobbyists and other insiders that only show the purported benefits?

[Philip Cross]

Yes.

[The Chair, Liberal, Wayne Easter]

If anybody also wants to come in, raise your hand and I'll let you in.

Go ahead, Mr. Cross.

[Philip Cross]

It's going to be very difficult. I think it would take a dedicated group to study it, first of all by compiling a list of all the subsidies given to corporations and then by looking at those that succeed and pay off and also those that don't.

When I started looking into this, I phoned up StatsCan and my former colleagues and said, “What is the total number of subsidies?” The people in the national accounts basically gave me an incomprehensible answer, because in their definition, subsidies are only those that fit the national accounts, which is very restrictive and rather strange. It wouldn't be something that would be of interest to this committee. It certainly wouldn't be useful for evaluating the usefulness of these programs.

Therefore, it's going to take a group embedded somewhere else in government or a new group created at StatsCan to look specifically at this issue, but as I mentioned, I think it's something on which we do need more information.

[Pierre Poilievre, Conservative, Carleton, ON]

Look at the list of costs.

One, let's say we spend $7 billion on corporate subsidies. That's $7 billion that had to be taken out of the economy in the first place; taken from entrepreneurs, consumers and workers in the form of taxation. What would have been the benefit of leaving that money in the economy in the first place?

Two, you have the administrative costs. Effectively, we have businesses that send money to CRA. Then the money goes from CRA to the industry department. Then the businesses have to hire a consultant to apply to get a subsidy back. Then the bureaucrats at the industry department have to review that application. Then the business has to hire a lobbyist to go and lobby for some of the money back. Then after some time and delay, the government decides it's going to provide the subsidy, and so the business gets some of the money back that it paid in taxes in the first place. All of that administrative cost is inculcated into the system.

Then as I said earlier, you have the cost to the competitor, who has to pay taxes so that his competition can get a subsidy from the government.

None of these costs ever come out when politicians release communications products at the cheque-writing ceremony.

Dr. Mintz, do you have any idea of how we could calculate these real costs so that we can do a real cost-benefit analysis?

[Dr. Jack Mintz]

Well, there are some ways in which people do try to estimate some of the costs, but not all the ones you're thinking of.

For example, the cost of raising tax revenues has been studied quite a bit. In fact, my colleague Bev Dahlby at the University of Calgary, who is actually one of the international experts in this area, has estimated the marginal cost of taxation.

Usually you might think that when you raise a dollar of taxes, it costs a dollar, but then when you start adding on the economic costs, which result in, let's say, discouraging work effort, risk-taking, savings and investment, depending on the type of tax you're looking at, one can then incorporate those costs. For example, typically corporate income taxes are the highest in terms of economic costs. The marginal cost of funds, instead of being a dollar, would be two dollars or more with the corporate tax.

Land transfer taxes are actually really high. Australian studies and some others have shown that these real estate transfer taxes actually could be almost as high as the corporate tax in terms of their impact, especially when they apply to commercial property, because of all of the distortions that are imposed. Then when you get down to the property tax, it's actually not too bad in terms of its distortions on the economy,

As you can see, there are measures right now that one can include.

The other big issue, which both Philip Cross mentioned and I mention in my notes, is the whole question of displacement, and that's the competitor issue. When you give a subsidy to somebody, usually they go to various groups that will do what's called an economic impact analysis, which is, frankly, the biggest joke in the world when it comes to economic analysis.

What is it based on? It says, “Okay, we're going to create so many jobs in the sector”, which again is the point you raised. There are ways of trying to estimate how much the net job increase would be, but then you also have to take into account whether there's displacement from other sectors. What economic impact analysis assumes is that there's never displacement, but in fact it's the opposite: If you create more jobs here, then there is an indirect impact, such that the industry is going to buy more goods from another industry, etc. Then they start adding up and say, well, that's going to create jobs in every other sector as well.

That's pure garbage, because really what happens is that there's a displacement of labour and capital in the sense that if you give a subsidy to somebody—let's say somebody who's competing with somebody else—then you may be taking business away from the other person and reducing demand for labour and capital in the competitor.

Economists have taken that into account. It's usually called “general equilibrium analysis”, and there are ways of actually incorporating that so you take into account the constraints in the economy.

Let me give you my favourite example. Quebec, at one point—

[The Chair, Liberal, Wayne Easter]

We'll have to do it very quickly. We're substantially over your time, but we're going to have plenty of time in this round.

[Dr. Jack Mintz]

I'll be very quick. It's such a great example.

Quebec decided to give a tax holiday to high-tech companies that would set up in...I think it was three buildings in Montreal. The people who owned the building were pretty smart. They just jacked up the rents and they captured most of the subsidy. Meanwhile, the landlords of all the other buildings that didn't qualify for these companies with tax holidays to come into their building were really angry because they didn't get these benefits.

This is a good example of a subsidy that doesn't work at all.

By the way, the more targeted the subsidy is to a very particular firm, especially amongst competitors, the worse it gets. The only area where I think subsidies do make sense—and I have to admit some of the points were made here—is with respect to innovation. However, you can define innovation way too broadly. You start including everything.

Certainly there is a strong argument for supporting innovation. There are different ways of doing it, including tax credits and grants. Lately I've been more interested in the grant side, if it's done properly, without the political favouritism.

I think those are things that could be considered.

[The Chair, Liberal, Wayne Easter]

Okay, thank you.

Mr. Fraser, the floor is yours.

As I say, if anybody wants to make a comment on a question, raise your hand and I'll get you in.

[Sean Fraser, Liberal, Central Nova, NS]

Excellent. Thank you very much, Mr. Chair.

Thank you to our witnesses for being here.

I'll start with our friends from Canada's Digital Technology Supercluster.

One of my favourite reads over the past couple of years was a book called The New Geography of Jobs, by Enrico Moretti. It focused on the U.S. and it was largely an argument in favour of implementing measures that encouraged the construction of ecosystems that might not exist otherwise.

One of the themes that I picked up through the testimony of a number of our witnesses is that some of the kinds of subsidies that have benefited your organizations have allowed different industries to solve problems that might not otherwise have been solved. I appreciated Mr. Mintz's testimony about focusing on innovation in particular.

Ms. Paish, you focus specifically on things like reducing wait times for cancer diagnoses or the prevention of fires.

I'm curious if you have advice for us on how we can focus the investments we make to help build these ecosystems that will have a long-term return on investment and allow us to solve social problems of pressing concern that would otherwise not be solved.

[Sue Paish]

Thank you, Mr. Fraser. I appreciate the question.

One thing we do in our organization that I think is different from what has been done in previous attempts to encourage economic development and innovation is that we focus first on the problems.

One of the things that I mentioned we have done, and it might be useful to consider it in other contexts, is to go to different groups in society, whether those be families or communities in remote rural areas or experts in a certain area, and ask for a discussion on what they perceive to be the biggest problems. We've been quite surprised, I will say, in approaching issues from that perspective. Start with the identification of the problem.

The second thing is to resist, with all that we can, tunnel vision. I'll use an example here.

When we are building new hospitals—and we are doing a lot in British Columbia right now—we tend to look at other hospitals around the world to see how they've been built. What if you look at how aircraft are produced? A lot of the things that you're trying to do when you're building an aircraft in terms of quality, efficiency and fast turnaround times are similar. You have a product coming out at the end that is better than the product that went in the front door, so once you identify the problem, avoid having only organizations that are in that sector or in that industry opine on that problem. Encourage different groups to come to the table.

There are two really important outcomes.

One is that people start to think about solutions differently. If we can encourage people to listen more than they talk—it's a learned skill—then it's amazing what we can learn.

The other thing that happens is that if an organization in the conversation doesn't have a solution to the particular problem, they hear about things that other organizations are doing and then they follow that thread. They start to build that ecosystem of, “Oh, I didn't know you were involved in this. I'm also interested in this.” I gave some examples of this in some of my comments, and I do have more examples.

There's an example I can give you in respect of a company called Terramera. They may be known to some folks here. It's very much focused on precision agriculture. At one of the events we held, a social event to get people to start listening to each other around some of our industry areas of focus, the chief scientific officer of Terramera bumped into an entrepreneur from a small company called Compression.ai, which has really exciting technology. It is what it sounds like: taking the massive amounts of data that arise from AI and compressing the data so that it's more usable and much cheaper to use. As a result of that connection, that collision, and two people listening to each other, Compression.ai now has its first customer for the industrial application of its technology through a project that Terramera is doing to improve crop health.

What I would say is identify problems; invite unusual, disparate organizations to have a conversation; and avoid having people with their elbows up who think they have all the solutions and ask them to listen before they talk.

[Sean Fraser, Liberal, Central Nova, NS]

Thank you.

To our guests from Carbon Engineering, congratulations on your recent success. The folks you're meeting with obviously have an impressive background, to say the least.

I've been reading about your technology for a couple of years and I find it absolutely phenomenal. In particular, you gave some advice near the end of your testimony about focusing on early start-ups and targeting businesses that can actually serve the public interest, or the public good, which is, I believe, how you phrased it. I'm curious if you can describe in a little more specific detail how a direct investment has allowed you to commercialize a technology that was in the inception stage and actually solved a problem. Where would you be without the support of federal departments along the way?

[Steve Oldham]

It's very difficult to start a major business. We're just north of Vancouver, in Squamish. To do that, you need to get clear recognition of your technology and what you can do. We had a good idea—not me, but the founders of the company, my employers, had a good idea. Bringing that to light and convincing people that this was a way they could make a big difference in climate change required the technology to be demonstrated.

The real birth of Carbon Engineering was the pilot facility that we were able to make in Squamish, British Columbia. To do so, we attracted funding from two or three different government departments at the federal level, at the provincial level and from both sets of governments, Conservatives and Liberals, through time. We were able to build that facility.

Since then, we've raised $100 million. We've had many visitors come to our facility. Every single one of them wants to see the technology working. No matter how good an idea you have, if you can't demonstrate that it's working physically and show the results—in our case, through four years of operations—you can't make an impact. Now when I go out to do those meetings and talk to people, I'm backed by evidence. I'm not saying, “Here's a good idea” and showing a really jazzy PowerPoint slide; I'm showing real work. That real work was done through both private investment and investment from the government.

I will say that the investment was not easy to get. The gentleman was talking about the difficulty of economic impact assessment. It's a very valid point. It's very hard for us to predict how many jobs our company may create or have in 10 years' time. I know how many we'll have next year and the year after, but not in 10 years. How many indirect jobs? All of that's really hard.

What should be clear is if you're doing innovation in an area in the public interest—like climate change, for example, and many of the things Sue's talking about—those ideas merit support as long as they're thoroughly evaluated and as long as there's evidence that other people are backing them too.

[Sean Fraser, Liberal, Central Nova, NS]

Thank you very much.

Is there time for one more quick one?